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  • Fintech 🧠 Food - Fintech comes of age, Square bets on Bitcoin, Revoluts' new rate, and 4 fintechs you should take a look at.

Fintech 🧠 Food - Fintech comes of age, Square bets on Bitcoin, Revoluts' new rate, and 4 fintechs you should take a look at.

In case you missed it, last week, I posted the Ping-An case study, the tech giant masquerading as a finance company. If you want to see the future of big-finance, Ping-An is THE case study.

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Brain Food Rantings

Fintech is starting to really bite the ankles of the finance industry. This chart looks eerily like the advertising industry in ~2003. Fintech is reshaping financial services. But when you put a chart like that on twitter, everyone wants to tell you why it's not that big of a deal... 👇

I get it; the P/E multiples right now are more than a little frothy (especially when you consider Tesla has a P/E multiple of nearly 1,100x). But zoom out. Either we're living through a form of the industrial revolution, as the economy shifts to digital or we're not. This is why tech always looks overpriced on a 12-month time horizon, but probably fairly (or under) priced in 10 years. People often point out payment firms don't always compete with banks, and the market cap isn't a fair measure of market impact or earnings.

But you can't ignore the fact that Square is nearly as big as Goldman, and PayPal close to JP Morgan's market cap.  These price changes might seem symbolic, especially when you consider Square's P/E multiple is around 308x earnings, vs. Goldman closer to 15.7x.

Now, look at earnings. Square's earning's growth in the past 12 months was 69%, PayPal's was 49% (to give that a sense of scale, when was the last time you got a 70% pay rise?). By contrast, JP Morgan's YoY earnings growth was -51%. Negative fifty one percent!  (Sure, that's during a pandemic and with branches closed. But JP Morgan has an active trading desk that can benefit from volatility too. )

Banks and fintech's are not the same businesses; they do different things, they're regulated differently in many cases, and fintech's aren't (always) trying to be banks.  But what fintechs are doing and have done is why they're growing. Contrast their modus operandi:

  • Banks tend to start at their business model (deposits, lending), then look at how to distribute that (branches, maybe a mobile app), and then the customer gets a product.

  • B2C fintechs start at the customer problem and use tech to figure out how to solve the customer problem and build out business models.  

I'm aware fintech's are often VC funded and have the luxury of gaining user adoption before they have to get to profitable revenue. But, rather than trying to distribute an analog business model through digital platforms, fintech (both B2B and B2C) are born digital.  

The pandemic, long term low-interest rates, and the investor search for yield are pushing capital towards VC and big tech, but that can't be an excuse to ignore the macro trends. You can throw out all the caveats in the world; it's still massive disruption, even if one chart doesn't tell the whole story. Tech is replacing analog. Fintech doesn't do the same as banks, but it will in time. Change is slow until it's sudden.

Public (or private) market fintech looks very overpriced right now (especially in the USA), but everything does on a 12 month time horizon. I've also never been more sure that fintech is just getting started.  

Big themes this week

  1. Every old bit of finance infra will have a better API

  2. Launching a Neobank with a rates offer alone isn't enough

  3. The payment network wars are worth paying attention to

  4. BNPL isn't the messiah or the naughty boy; it's just interesting

4 Fintechs 🤑

1. Bloomcredit - Credit Data as a Service 📈

  • Bloom credit provides APIs to read and write to credit bureaus easily. Reading and writing from credit bureaus is important but difficult. Important because, if you want to give someone a credit product (like a loan), the bureau has a ton of data that can help verify the person you're lending to is who they say they are and if they've been successful with credit before. Hard because working with a bureau involves a long contract, and the API's aren't great. 

  •  60% of consumers could be credit-worthy, but only 28% are considered financially healthy today.  Most early Neobanks aren't set up to do a credit-builder product (it took Chime 7 years from launch). It's more likely newer, smaller lenders will take this approach, but to do so, they need to get access to the credit bureaus.  Bloomcredit may well start there but become super useful in the world of embedded lending, and like Twilio, over time, find it's way into the enterprise.

(h/t Ian Kar for some of the info) 

2. Nivelo - ACH risk management as an API 🔌

  • ACH is huge. $55 trillion annually huge.  Nivelo is a single API that risk assesses any ACH transaction (fraud, cyber, settlement risk, and more). By unbundling the risk assessment from the transaction processing software, Nivelo makes it much easier for innovators to bake ACH into their service (either Neobanks or any company embedding finance).  

  • You could imagine that with Moov.io + this, there's a reasonably neat ACH solution for nearly all use cases.  These unbundled B2B APIs are genuinely making finance modular.  There are still so many things banks do like this that could be unbundled that are non-differentiated.

  • Nivelo just raised their $2.5m seed, and Eli Polanco, the founder, is a black woman who's raised from some exceptionally credible investors (FirstMark, Barclays, and Anthemis). Here's hoping this is starting a trend.

3. Griffin - BaaS aiming for banking Licence in the UK 🚗

  • Griffin is a BaaS provider with its own license (a bit like Germany's Solaris bank), no counterparties, no partner banks who take 6 months. It's all in one place. Built by some of the team who founded Standard Treasury, this is one to watch. Getting a license is a long process and capital intensive, but if they pull this off, it could be a model we see many more emulate.

  • When you build your new Neobank, chances are you have to make your own compliance function (as you scale). You're also often limited by what the underlying partner bank can do, no matter how great the abstraction APIs.   Griffin would be like if a partner bank had the best APIs ever and handled most of the bank stuff for you as long as you needed it.

4. Duco - Bank back office recs (hard stuff) as a service (almost) 📜

  • I don't know if you've ever worked in a finance team or a bank. But reconciliation in a bank doesn't mean making up with a loved one. It means pain, spreadsheets, and aging systems. Disconnected systems, currency differences, and format differences make it way harder than it should be to figure out who paid what to whom. Oh, and reporting that to the regulator? Extra hard.

  • Duco has pre-configured recs for CFTC swaps, Dodd-Frank, EMIR, cash reconciliation, payment matching, and much more. Upload the files (e.g., SWIFT, internal CSVs), and Duco will figure out how all of those data sets match. For the gruesome bit of back office, this stuff matters.  It did make me wonder, though, could they do this as an API? They're selling very much to the institutional and cap markets space rn. If I was gonna, go found a company rn this might be one area I'd look...

Things to know 👀

1. Square put $50m into Bitcoin on its balance sheet 

  • Purchasing 4,709 Bitcoin, Square's investment represents 1% of its total assets. Square framed this as a real endorsement of Bitcoin "Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company's purpose."

  • Jack Dorsey also took to twitter to kick the CEO of Coinbase Brian Armstrong (who recently decided Coinbase wasn't going to have employee activism). Dorsey said: "Bitcoin (aka 'crypto') is direct activism against an unverifiable and exclusionary financial system which negatively affects so much of our society." Well said, Jack. 👏

  • 🤔 My Analysis: Hedge funds have allocated 1 to 2% of capital into Bitcoin as an inflation hedge for some time now. Bitcoin is available via Robinhood, and now Fidelity, and the chances are there may even be some in your 401k / pension. It's mainstream.

  • 🤔 My Analysis: Bitcoin, the inflation hedge, is actually a sensible choice.  In the past year, we've seen an unbelievable amount of money printing from major central banks.  I wouldn't be surprised if more corporate treasury teams are very seriously considering Bitcoin allocations.

  • Marqeta, the card-issuing platform behind Square card, Uber, Instacart, and DoorDash card programs, has received a Mastercard investment. The amount is undisclosed, but in May, it raised $150m and $4.3bn valuation on 2019 revenues of $300m. This investment appears to be about expansion into Asia-Pacific.

  • 🤔 My Analysis: South East Asia is the critical battleground for fintech, big techs, and payment networks. Ali and Tencent have significant presence and investments across the region, while Mastercard and Visa have a not insignificant install base. The more entrepreneurs building using the Mastercard rails, the better for Mastercard.

  • The headline basically says it all. Aside from the headline-grabbing rate, the economics here probably still just about make sense for Revolut. The rates are annualized, so monthly, they're giving back ~40 to ~60bps depending on spend. The interchange revenue would likely cover the costs of this "bonus rate" (god bless Durbin).

  • 🤔 My Analysis: Revolut has to do something to try and break the US market; they have less than 1% market share of the neobanks despite significant spending and launching crypto trading a few months ago. They're a European behemoth, this at least shows some adaption to the US market, but there's work to do. Transferwise is faring much better in the US, and I'm surprised Revolut hasn't leaned into it's original UK value prop of best FX rates in the market more.

4. Affirm is heading to IPO

  • Techcrunch rumors suggest the BNPL giant would IPO in the region of $10bn, this isn't the S1 filing that would give us much more detail, but I cannot -wait- for the S1 club review of this one

  • 🤔 My Analysis: Everyone seems to hate BNPL because it appears to be a predatory form of lending. Positioned at e-commerce checkout, it becomes easy to "split" payments over 3 months, without realizing you're taking out credit. There have been examples of some consumers ruining their credit score without realizing what they have done. The combination of increasingly slick checkouts and soft credit checks have reduced consumer friction so much it can be too easy to fall into a trap.

  •  🤔 My Analysis: Having spent about 3 months looking at the sector for a client in 2018, I actually like* BNPL, and used right it's massively in consumers' interests. The 0% APY rates are funded by the merchant (who covers the 5 to 10% risk of non-repayment). Sure, the merchant can mark up their items to cover that additional fee (and it's more than interchange), but to you, the consumer, you either pay full price in one go or at 0% over 3 months. Affirm claims they can approve 126% more loans than private label cards, with lower lending losses than those cards. So net-net, BNPL is often better for consumers than traditional credit cards, even if it's a little too easy to get sometimes.

* Something does need to be done to ensure consumers know they're taking out credit

Good reads 📚

1. We need a financial health score - (Ron Shevlin on Forbes)

  • The credit score isn't good enough. But Ron makes three predictions 1. Financial health will become the new basis of competition in banking, 2. Financial health platforms will emerge. 3. The government will stick its nose into financial health

  • 🤔 My Analysis: The financial health platforms are already emerging; they look like PFM (e.g., copilot, snoop, etc.). That said, there's room for best practice and more holistic financial health scores and planning. It needs to become more consistent across the industry.

  • 🤔 My Analysis: The financial health network has the "FinHealth Score" methodology, but what will it take to make this something people can use and embed?  Is this an opportunity for the bureau's themselves or someone like Bloom Credit? In the UK, Credit Kudos is an open banking driven challenger bureau. Sometimes it's just a case of putting the pieces together.

2. Ant Group And Fintech come of Age (The Economist)

  • Ant Financial has more than 1bn users and connected more than $16bn of transactions last year. When listed, it will be roughly the same market cap as JP Morgan, and it offers nearly every service the US megabank does. "If the world's listed banks cut expenses by a third, the saving would be worth $80 a year for every person on Earth. Ant makes razor-thin margins on payments and takes minutes to grant a loan."

  • 🤔My Analysis: This is why I get so ranty about fintech changing banking.  Everyone wants to point at why banks and big fintech are different, but almost nobody wants to address the point. Fintech is reaching a tipping point. 

3: Bonus Food: Two largest Equity Crowdfunding marketplaces merge (11FS Blog). Read this if you care about how we open up early-stage investing to wider audiences and if we can create API first private markets.

Tweets of the Week 🕊

(I want that Razer card so much)

That's all folks 👋

Got a favorite fintech you'd like to see in Brain Food?

Drop me a message :)